OPEC is all but certain this week to slash oil output in a bid to counteract falling demand and a precipitous drop in crude prices.
The big question is: Will it work? Or will an enfeebled world economy continue to drag oil prices down even in the face of concerted OPEC action?
Ministers within the Organization of Petroleum Exporting Countries, which supply 40% of the world's oil, appear ready to back a cut of a million barrels a day or more in a bid to soak up excess supply and protect their own budgets. Officials say the cut could come in two stages -- some of it now, and the rest in December, when the group plans to meet again.
But the cartel has a mixed record in trying to stop sliding prices by cutting supply, especially in the face of a strong recession. The group failed famously in 1998, when it lopped off 2.5 million barrels a day in the midst of the Asian financial crisis, and had only spotty success in 2001.
Friday's emergency meeting of the 13-member cartel comes amid a spate of increasingly grim forecasts of sharp economic declines next year across much of the industrial world. Falling demand for oil in the U.S. and Europe this year has been a significant force driving oil prices down more than 50% from their record highs this summer.
Deutsche Bank, in a report Monday, predicted that anemic 1.2% growth in the world's economy next year could drive oil prices as low as $50 a barrel -- roughly a third of their summertime high.
Oil at that price would cause pain across much of the cartel, where government spending has ballooned in tandem with skyrocketing crude prices. An International Monetary Fund report released Monday said that Iran requires oil to average $90 a barrel this year to avoid deficit spending. Bahrain requires $75 and Oman, $77. Iraq, which the IMF says needs oil at $111 a barrel to balance its books this year, is already looking at ways to curtail spending in 2009.
Oil prices continued their wild ride Monday, with U.S. benchmark Nymex crude rising $2.40 a barrel, or 3.3%, to close at $74.25 on the New York Mercantile Exchange. In intraday trading, Nymex crude rose as high as $76.12 and fell as low as $71.77. Expectations of an OPEC cut gave prices a boost, finishing up for a second straight trading day, but a continued upward swing in prices this week could complicate the cartel's desire to reduce world oil supplies.
Some oil-consuming countries have begun to caution against an OPEC cut, arguing that the world economy needs the boost of lower energy prices. "We think they need to keep the markets well supplied," said U.S. Deputy Energy Secretary Jeffrey Kupfer.
OPEC, though, contends that a production cut is needed to avoid sharp oversupply as the world's thirst for oil diminishes. It expects world demand for its crude to drop by nearly 900,000 barrels a day next year compared with 2008. The world now consumes about 86.5 million barrels a day. The OPEC estimate, which is close to the International Energy Agency's forecast, reflects weaker U.S. and European oil demand and projections for added non-OPEC production next year.
Some OPEC ministers have said in recent days that the group could decide to roll back production in multiple steps, as the producer group did in late 2006 when it announced two cuts, totaling 1.7 million barrels a day, in October and December of that year.
"I believe this will be a good possibility. Remember this is what we did in 2006. There is a lot of uncertainty today. We don't know how things are going to look next month or in December," said Shokri Ghanem, head of Libya's National Oil Co.
Many analysts at the time believed the late-2006 production cuts were aimed at protecting a price floor of at least $55 a barrel. After Friday, OPEC is scheduled to meet again Dec. 17 in Algeria.
A decision to trim production will raise the perennial question in the cartel of who should do the cutting. Producers such as Nigeria, Iran and Venezuela, which are already under growing fiscal pressure, will be loath to cut back even in the face of falling prices. So that job will fall largely to Saudi Arabia, OPEC's largest producer by far. The Saudis until now have been hesitant to reduce output this year, but analysts agree that the kingdom is serious about ensuring that prices don't fall below $60 a barrel.
OPEC often doesn't live up to its promises to trim or add barrels. In 2006, the cartel said it was going to cut 1.7 million barrels a day but trimmed far less than that. Similarly, OPEC ministers could try to send a message to the market by announcing dramatic cuts, even if the reality falls short of the pledge.